Can Money Fail?

A version of this blog was originally posted on Quora, March 5, 2022.

With economic systems, there are at least two kinds of failure. Both are a variation of utility.

(1) Utility as Functional When features within an economic system prevent or inhibit the ability of institutions and transactors from exchanging goods, borrowing money, lending money, or providing services, then one can say there is a functional failure.

Functional failure can often include other factors that are not specifically economic. For example, F. A. Hayek alleges that in so-called socialist societies that try to engineer society in a specific way, such engineering prevents the exercise of rational capacities in individuals (i.e. trial and error) that can lead to innovation and the creation of value. (I say so-called because Hayek’s definition of socialism is narrow and does not represent socialism as such.)

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(2) Utility as Satisfaction The more common notion of utility in economics has to do with the satisfaction of a transactor’s preferences, which can include both needs and desires.

If an economic system is inefficient in being able to provide utility satisfaction, we can say it fails in being able to circulate wealth; and in doing this, we can say that without proper circulation of wealth, the vital processes of creativity and production (which rely on the use of wealth from other sectors of an economy) have failed.

An important note: if we expand the idea of utility to involve some notion of well-being (or welfare), we can also say that failure to satisfy preferences is really a failure at creating a better society in which the lives of its citizens reach an acceptable level of quality. An economic system, in that sense, would be inefficient. And this then overlaps with the first definition of utility as functional. (And then we can talk about morality and economics in terms of utilitarianism.)

Does Barter Fail? I always like to point out that barter was not the first and most prominent form of trade for ancient and archaic societies:

"The way trust informs relations of exchange has been well argued by the likes of such political economists as Henry George and, more recently, by the anthropologist David Graeber. Both George and Graeber convincingly dispel the idea that barter was the most basic and original form of exchange between societies. George argues barter is really a form of trust that is extended over time within a society. That is, barter is really a form of credit." (For more on this, click here.)

Apart from that, we can say that barter might fail according to definition (2), since it can be cumbersome to find people with the goods you want and who want what you have.

Having said that, such a failure does not mean it ceases to exist or ceases to be used.

Economic behavior tends to follow the path of least resistance (in view of the goals one has). So barter would simply recede from the scene as a form of trade, but it might very well come back in certain instances—e.g. people want to avoid tax consequences and simply swap goods on the spot.

Money Money can fail in sense (2) when a currency is devalued (and does not allow one to acquire what one might have had the currency not been devalued), prohibited (sanctioned), or not wanted (someone simply does not trust the currency as a store of value).

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More interestingly (at least for me), money can fail in sense (1) when the flow and circulation of money is controlled in such a way that it favors a small percentage of the population.

In other words, central banks, governments, and financial-related institutions create structures and procedures that prevent freer access to money. This occurs most explicitly in how banks lend money. The rich are greatly advantaged by the current system since they have financial standing and can get large loans at very low interest rates. This sum can then be invested with a return above the interest rate of the loan. It’s basically free money to use to make more money.

Less explicitly, the entire system can be geared for sustaining an economy that simply creates a situation that is depressive for most people, yet seen to be the normal state of affairs. Here’s an interesting take by Robert Reich on how decades of financial policies led to some significant past and recent problems:

"[T]he dominance of finance over much of the American economy since 1980 didn’t happen by accident. It needed the help of politicians — including presidents (both Republican and Democrat) — who changed laws and regulations to encourage it. . . .

When the financial bubble inevitably burst, Barack Obama endorsed the Bush administration’s Wall Street bailout and appointed many of the same team of Clinton-era economic advisors who, while working under Rubin in the 1990s, had laid the groundwork for the financial crisis by encouraging speculation. Obama did what they then recommended: restore the profitability of Wall Street banks rather than reduce the power of finance and help millions of Americans who lost their homes."

There are other ways in which money can fail in sense (1), but as a way of closing, I’d just like to mention that the promise of blockchain technology and decentralized finance is to provide everyone with easier access to money. There are significant challenges, such as rectifying the need for over-collateralization. My colleague Sebastian Purcell points out more of the challenges in a blog from March 2022.

So the DeFi promise is still far off, and cryptocurrency is still very much a speculative venture in both financial and practical senses. It needs to be more user-friendly and more widely accepted; but also, as my venture capitalist colleague Arvind Gupta put it, it needs to get out of the mindset of making money without creating value. It needs to do both.


Todd Mei is former Associate Professor of Philosophy (University of Kent) who specializes in the philosophy of work, ethics, and classical economic theory. He is now a consultant for businesses and is a podcaster for Living Philosophy, a public series exploring ideas about life and the inspiring second-lives of people. You can follow him on Quora,Twitter and YouTube.

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